The Future of Custody: State Street’s Joseph Antonellis on Data Analytics

As Global Custodian celebrates is 25th year, we look at how market events and regulatory changes in recent years are shaping what is to come. In the first of a series of interviews with senior executives, we speak to Joseph Antonellis of State Street about the strategic shift in securities services and where the future opportunities lie.
By Janet Du Chenne(59204)
About three years ago, State Street took a strategic look at where it could provide the most value. Sensing that regulatory change was going to have a significant impact on its institutional investor clients, it teamed up with the Economist Intelligence Unit (EIU) to find out where these clients’ pain points were, leading the custodian bank to refresh its international strategy to help with those challenges.

“As we come out of the crisis, the things that are top of mind for our clients certainly revolve around all the regulatory reform and the regulatory nature of changes that are causing them to be more transparent to their clients and to provide better analytical information. Therefore we have to do the same,” says Joseph Antonellis, State Street’s vice chairman and head of Europe and Asia-Pacific Global Services and the Global Markets businesses.

The independent research looked at the challenges of particular client segments, based on interviews with asset managers and asset owners. It found that 75% of asset managers are spending some money on data and analytics, and 13% are spending substantial amounts of money on that to try get ahead of the curve.

“Strategically we wanted to invest in the data challenges that our clients have. We reorganized ourselves around client sector solutions, including an insurance segment and an asset manager segment,” says Antonellis. “The people within those teams use our industry research and solutions and developed toolkits to cater to what a typical asset manager would want and how would we sell that.”

The research and the reorganization led to the creation of the Global Exchange business. Antonellis comments on its make up: “The whole need for data and analytics has changed, and how people view and use data was a key theme from the research papers we did. Across all segments, everyone is looking for more transparency, more risk analytics, and to understand where they’re spending the right money and getting the right yield based on the risk they are taking in their investments. State Street already had a lot of solutions in this space, and we thought what if we were to pull all of the divisions that have some sort of research and analytic muscle behind it. It was already a substantial business for us, it was just individual P&Ls that we put together.”

The alternative investment sector has been State Street’s fastest growing product servicing group within Global Exchange. “I think that while the industry grew in 2012 and 2013, with 15% compounded growth rate, we grew at 35% through both organic and inorganic growth with some acquisitions with investment spend around alternatives,” says Antonellis.

State Street has also undergone a major IT transformation program as part of the genesis of Global Exchange. This includes a move to the cloud, providing the custodian with the ability to do more with data and analytics. “We saw the power of that, coupled with the client’s desire to grow in this business,” says Antonellis. “We put those two together and that’s how it became the genesis for Global Exchange.”

At the same time, State Street’s efficiency program, which commenced four years ago, sought to realize $600 million in savings. “We’re well on track for the entire savings push,” says Antonellis. “It’s pretty explicit in terms of where the savings are. There has been an improvement in servicing as well. We analyzed our operations using the lean technique—from the perspective of looking at the operations and identifying where we can do things better, more efficiently, with a better layout and better technology. So we believe we have been delivering not just savings for the company but improvements in service for our clients.

“We continue to see the benefits. We’ve achieved each year’s goals so far and we are on track with this year. We look at other areas of improvement, what else can we do with technology, how can we move towards what we call a fully integrated visual enterprise where more work is done with higher automation to free up staff to be more creative, analytical and consultative with clients.”

And the investment appears to have paid off. “In our latest financial report our operating margins are the highest among the traditional U.S. banks we are measured against,” says Antonellis. “We have had a fantastic year in terms of revenue growth versus expense growth or operating leverage. So I think we’ve proven that this transition has helped on the top line in terms of maintaining revenue growth and on the bottom line so that we can expand our capacity without dramatically expanding our expenses.”

At a time when price increases for custodians are difficult, State Street is focused on increasing revenues. “This goes back to what the clients need and what services we can provide them with,” says Antonellis. “Collateral management is one of them along with servicing alternative investing, including private equity investing, real estate fund investing and infrastructure fund investing and making sure we have the depth of capability to provide managers in those areas with the appropriate administrative tools.

“Also, countries around the world have to deal with their pension liabilities and come up with different approaches to meeting those liabilities such as liability driven investment strategies. We need to continually invest in how they meet those needs and depending on their level of maturity of the level of pension provision the solution set for them will be different.

“I think the future of the custody industry will be in each of those segments, meeting the needs of the clients and making investments in better risk management and risk services, better risk services, better dealing and handling your multi-asset portfolio, and certainly better handling of collateral risk management because everyone expects that to be booming over the short term.

“Despite having the capabilities there already, this is where we will see continued investment, along with the big growth in data and analytics where there is a lot more to be done around collateral management as the regulations get written.”

State Street will also continue to invest in the alternatives sector through acquisitions, such as when it bought Goldman Sachs’ hedge fund administration business in 2012, and making sure its set of capabilities meet the full needs of its clients. “Then as these asset managers and asset owners change their asset mix, some of them are insourcing asset management so we have to take what we’ve done for outsourcing for the big asset managers and make it available to asset owners now who are doing it more internally. And we have investment going on there as well.”

Antonellis believes custody is a business where there is medium and long-term growth and, because of the macro trend of globalization, with asset managers getting into emerging markets and developed markets and helping investors and plan sponsors with their retirement savings, and because of regulatory change, those trends provide State Street with the ability to be able sell services and products. “The remainder will come; interest rates will change, spreads will normalize,” he says.

He also believes the returns have improved enough to justify not only the regulatory capital requirements but also the shareholders’ investments. “It makes sense to keep investing as returns have improved,” he says. “As I said, because of market based revenue and interest rates we are not back to return on assets and equity we had, but there is certainly enough growth in our business and growth in our client needs to continue to invest in our market.

“Yes, pricing is competitive but we are all thinking of different ways about how we provide that value so that we can get paid appropriately for what we do. So you’re not going to see an across the board price increase. I think you have to prove that you can provide better value for the client, through improved products, increased capabilities and the soundness of your institution, then people will want to pay for that.”

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